Accounting for Interest Rate Swap Agreements

3 Months Ended

Mar. 31, 2013

Accounting for Interest Rate Swap Agreements

Accounting for Interest Rate Swap Agreements

7.  Accounting for Interest Rate Swap Agreements

We are exposed to market risks primarily associated with changes in interest rates. We use derivative financial instruments to minimize the risks and/or costs associated with financial activities by managing our exposure to interest rate fluctuations on a portion of our debt obligations. We do not use derivative financial instruments for trading or other speculative purposes.

Interest Rate Risk

At March 31, 2013, we were a party to interest rate swaps pursuant to which we make fixed payments and receive floating payments on a notional value of $250.0 million. We entered into these swaps to offset changes in expected cash flows due to fluctuations in the associated variable interest rates. Our interest rate swaps expire in November 2015. As of March 31, 2013, the weighted average effective fixed interest rate on our interest rate swaps was 1.8%. We have designated these interest rate swaps as cash flow hedging instruments so that any change in their fair values is recognized as a component of comprehensive income (loss) and is included in accumulated other comprehensive income (loss) to the extent the hedge is effective. The swap terms substantially coincide with the hedged item and are expected to offset changes in expected cash flows due to fluctuations in the variable rate, and, therefore, we currently do not expect a significant amount of ineffectiveness on these hedges. We perform quarterly calculations to determine whether the swap agreements are still effective and to calculate any ineffectiveness. During the three months ended March 31, 2013 and 2012, there was no ineffectiveness related to interest rate swaps. We estimate that $3.5 million of deferred losses attributable to existing interest rate swaps and included in our accumulated other comprehensive income (loss) at March 31, 2013, will be reclassified into earnings as interest expense at then-current values during the next twelve months as the underlying hedged transactions occur. Cash flows from derivatives designated as hedges are classified in our condensed consolidated statements of cash flows under the same category as the cash flows from the underlying assets, liabilities or anticipated transactions.

The following tables present the effect of derivative instruments on our consolidated financial position and results of operations (in thousands):

	March 31, 2013
	Balance Sheet Location	Fair ValueAsset(Liability)
Derivatives designated as hedging instruments:
Interest rate hedges	Current portion of interest rate swaps	$	(3,497	)
Interest rate hedges	Interest rate swaps	(5,230		)
Total derivatives		$	(8,727	)

	December 31, 2012
	Balance Sheet Location	Fair ValueAsset(Liability)
Derivatives designated as hedging instruments:
Interest rate hedges	Current portion of interest rate swaps	$	(3,873	)
Interest rate hedges	Interest rate swaps	(6,043		)
Total derivatives		$	(9,916	)

	Three Months Ended March 31, 2013
	Gain (Loss)Recognized in OtherComprehensiveIncome (Loss) onDerivatives		Location of Gain(Loss) Reclassifiedfrom AccumulatedOther ComprehensiveIncome (Loss) intoIncome (Loss)	Gain (Loss)Reclassified fromAccumulated OtherComprehensiveIncome (Loss) intoIncome (Loss)
Derivatives designated as cash flow hedges:
Interest rate hedges	$	216	Interest expense	$	(1,068	)

	Three Months Ended March 31, 2012
	Gain (Loss)Recognized in OtherComprehensiveIncome (Loss) onDerivatives			Location of Gain(Loss) Reclassifiedfrom AccumulatedOther ComprehensiveIncome (Loss) intoIncome (Loss)	Gain (Loss)Reclassified fromAccumulated OtherComprehensiveIncome (Loss) intoIncome (Loss)
Derivatives designated as cash flow hedges:
Interest rate hedges	$	(1,318	)	Interest expense	$	(1,260	)

The counterparties to our derivative agreements are major international financial institutions. We monitor the credit quality of these financial institutions and do not expect non-performance by any counterparty, although such non-performance could have a material adverse effect on us. We have no specific collateral posted for our derivative instruments. The counterparties to our interest rate swaps are also lenders under our senior secured credit facility and, in that capacity, share proportionally in the collateral pledged under the related facility.